On December 22, 2017, the largest tax bill since 1986 was signed into law. The Tax Cuts and Jobs Act (TCJA) made many changes to business taxes. First, let’s start with those items that were eliminated for 2017.
Business Tax Breaks That Went Away in 2018
- Entertainment expenses are eliminated. Before 2018, you could deduct 50% of entertaining customers and other business associates. Under TCJA the deduction is no longer allowed. So if you take a customer to a ball game or to a play, you cannot deduct any of it. Recently issued IRS regulations allow deductions for meals with customers and other business associates.
- If your business has a net operating loss for 2018 or later, you can no longer carry-back the loss to prior years to reduce that year’s income and get the business a refund. Instead the loss is carried forward until it is used up to offset future income. There is an exception for farmers who still have access to the 2-year carryback.
- Business losses for high-income business owners. For the years of 2018 to 2025, excess business losses are not currently deductible and instead are treated as a net operating loss that is carried forward. Excess business losses means the excess of business deductions over $250,000, or $500,000 on a joint return.
- Reimbursements to employees are now included as taxable compensation and you must now pay employment taxes on them.
- The gain deferral on vehicle and equipment trade-ins is eliminated for years after 2017. If you trade in a business vehicle, you will have to report a gain on the amount you received as a trade-in over the amount of your asset cost less depreciation. Of course, you can now depreciate the full cost of the new business vehicle without a reduction for the gain. So if both vehicles are used for business, you should end up in the same place as you would have under the old law.
- The 90% domestic production activity deduction is eliminated after 2017.
New Business Tax Breaks for 2018
Now let’s get to the good news for business owners! There's plenty to be happy about.
- The new law allows a 100% first year Section 179 deduction for both new and used business assets placed into service for 2018. The phase-out of Section 179 deductions is increased to $2.5 million.
- Large pickups, vans, and SUVs with gross vehicle weight ratings of at least 6,000 pounds used over 50% for business can now be 100% deducted in the first year.
- Property eligible for expensing now includes depreciable assets used predominantly to furnish lodging. Examples are furniture and appliances used in hotels, apartments, and rental homes.
- Commercial buildings can now expense roofs, HVAC equipment, fire protection, and security systems. This area is now much more complicated and you should contact a qualified tax planner.
- Don’t miss out on the new 20% business deduction (Section 199A). Starting in 2018, only 80% of your qualified business income will be taxed. This is a huge break for small businesses, but it comes with many limitations and is very complicated. If you own a profitable business, you definitely need to contact your tax advisor to ensure that you don’t miss out on this valuable deduction.
- The C-Corporation tax rate for 2018 changed from rates of 15% to 35% to a flat 21% on all income. This may cause some business owners who are now taxed as S-Corporations or partnerships to convert to C-Corporations. However, business owners should remember that any earnings taken out of a C-Corporation and transferred to the business owner will be taxed again, often referred to as double-taxation. Plus, C-Corporations do not qualify for the new 20% business deduction discussed above. This means in general that it is still better to remain taxed as an S-Corporation or partnership. This is a complicated decision so please meet with your tax-advisor.
- Businesses providing paid family or medical leave to employees qualify for a new credit of generally 12.5% of wages paid for family and medical leave. This credit is only for 2018 and 2019.
The bottom line? With all of the tax changes for 2018 and beyond, it is essential that you meet with your tax planner before year's end to make sure you pay the lowest amount legally allowed.
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